The introduction of electronic trading mechanisms into exchanges for securities and derivatives has been steady and relentless. The desire for immediacy of order execution and dissemination of information is one reason for the steady switch to electronic mechanisms. The simple fact that trading volume is growing, with the accompanying need for an increasingly efficient trading environment, also favors the move toward electronic trading mechanisms.
Traditional open outcry exchanges, however, can supply greater liquidity than electronic exchanges. One reason for this is the very efficiency that electronic mechanisms bring to an exchange. The speed with which trading takes place can adversely affect market makers by exposing them to unwanted risk. For example, if movement in the underlying security needs to be reflected in the options market, rapid response times are necessary. Communication delays can prevent market makers and others from changing their quotes or orders fast enough to reflect market conditions, thereby leading to smaller quote sizes to reduce the risk. Also, the price improvement capabilities of an open outcry exchange may be greater than an all-electronic exchange because floor brokers and market makers can handle large and complex orders face-to-face. Regardless of which type of exchange, whether the exchange uses one trading format alone or both formats in some combination, there can be challenges an exchange must face to attract and retain participants.
An exchange system and method that allows for efficient and transparent dissemination of the exact transaction costs to those market participants that remove liquidity (“taker”), and allows liquidity providing market participants (“maker”) the ability to choose the rate at which their liquidity is needed.